EM Preview for the Week of April 24, 2022

April 24, 2022

EM FX was mostly softer last week as the dollar’s broad-based rally continues. RUB, HUF, and CZK were the only ones to post gains, while ZAR, COP, and CLP were the worst performers last week. BRL and MXN also posted significant losses, which means that high interest rates are no longer providing as much of a cushion for these currencies. With Fed tightening expectations remaining elevated, we believe the dollar rally will continue this week and put further pressure on EM FX. Weak data out of China is also likely to weight on EM sentiment, with MSCI EM likely to test the March cycle low near 1024 in the coming days.

AMERICAS

Mexico reports February GDP proxy Monday. It is expected to come in at 2.50% y/y vs. 1.75% in January. If so, it would be the fastest since last August. However, much of it is due to low base effects as the economy remains generally sluggish despite high oil prices. Looking ahead, growth is likely to remain sluggish as Banco de Mexico continues to tighten policy in response to acceleration inflation. Next policy meeting is May 12 and some are looking for the bank to accelerate its pace to 75 bp from 50 bp the past three meetings. The swaps market sees 325 bp of tightening over the next 12 months that would see the base rate peak near 9.75%. March trade data will be reported Wednesday.

Brazil reports mid-April IPCA inflation Wednesday. Inflation is expected at 12.12% y/y vs. 10.79% in mid-March. If so, it would be the highest since October 2003 and further above the 2-5% target range. Next COPOM meeting is May 4 and a 100 bp hike to 12.75% is expected. While the bank had signaled that would likely be the final hike in the cycle, higher than expected inflation should force another hike at the Jun 16 meeting. The swaps market sees 150 bp of tightening over the next 3 months that would see the base rate peak near 13.25%. With the civil servants strike suspended, delayed data will start to trickle out. Central government budget data will be reported Friday.

Chile reports March manufacturing production and retail sales Friday. Production is expected at -2.4% y/y vs. -2.2% in February while sales are expected at 11.3% y/y vs. 11.8% in February. The economy is clearly slowing, which explains the central bank’s dovish surprise at the March 29 meeting when it hiked rates 150 bp to 7.0% vs. 200 bp expected. The bank noted more pessimism in consumer and business confidence and that activity is on a downward trend compared to last year. It added that future hikes will be smaller under its base case scenario. Next policy meeting is May 5 and a 100 bp hike to 8.0% seems likely. The swaps market is pricing in 175 bp of tightening over the next 3 months that would see the policy rate peak near 8.75%.

Colombia central bank meets Friday and is expected to hike rates 100 bp to 6.0%. At the January meeting, the bank increased the pace of tightening to 100 bp from 50 bp previously but then delivered a dovish surprise at the March 31 with another 100 bp hike to 5.0% vs. 150 bp expected. We expect it to maintain the 100 bp pace for now. Inflation was 8.53% y/y in March, the highest since July 2016 and further above the 2-4% target range. The swaps market sees 450 bp of tightening over the next 12 months that would see the policy rate peak near 9.5%.

EUROPE/MIDDLE EAST/AFRICA

National Bank of Hungary meets Tuesday and is expected to hike the base rate 100 bp to 5.40%. At the last meeting, the bank increased the pace of tightening to 100 bp from 50 bp previously and we expect it to maintain that pace for now. Inflation was 8.5% y/y in March, the highest since June 2007 and further above the 2-4% target range. The swaps market sees 150 bp of tightening over the next 12 months that would see the base rate peak near 6.0%. It is also expected to hike the 1-week deposit rate 30 bp to 6.45% at its weekly tender Thursday.

Russia reports March real retail sales, construction, and IP Wednesday. Sales are expected at -1.2% y/y vs. 5.9% in February, construction is expected at 1.0% y/y vs. 5.0% in February, and IP is expected at -1.7% y/y vs. 6.3% in February. The central bank meets Friday and is expected to cut rates 200 bp to 15.0%. Inflation has yet to peak but the strong ruble should lead to further easing. The swaps market sees 525 bp of tightening over the next 12 months that would see the policy rate fall to 11.75%. The economy is unlikely to respond much to these rate cuts as sanctions will continue to bite.

South Africa reports March PPI Thursday. It is expected to pick up a couple of ticks to 10.7% y/y. Money and private sector credit along with trade and budget data will be reported Friday. The swaps market sees 225 bp of tightening over the next 12 months that would see the policy rate rise to 6.5%, followed by another 100 bp over the subsequent two years that would see the rate peak near 7.5%. We do not think the economy is strong enough to withstand such an aggressive cycle. As it is, growth is likely to suffer from flooding this month that has severely curtailed activity.

Poland reports April CPI Friday. Headline inflation is expected at 11.3% y/y vs. 11.0% in March. If so, it would be the highest since July 2000 and further above the 1.5-3.5% target range. Next policy meeting is May 5 and a 100 bp hike to 5.5% is expected. At the last meeting, the bank increased the pace of tightening to 100 bp from 75 bp previously and we expect it to maintain that pace for now. The swaps market sees 150 bp of tightening over the next 6 months that would see the policy rate peak near 6.0%.

ASIA

Singapore reports March CPI Monday. Headline inflation is expected at 4.7% y/y vs. 4.3% in March, while core inflation is expected at 2.5% y/y vs. 2.2% in February. If so, it would be the highest headline reading since February 2013. While the MAS does not have an explicit inflation target, rising price pressures led it to tighten policy at its meeting this month by both steepening the slope and recentering its S$NEER trading band. If price pressures remain high, the MAS is likely to tighten again at its next policy meeting in October. March IP will be reported Tuesday.

Korea reports Q1 GDP data Tuesday. Q/q growth is expected at 0.6% vs. 1.2% in Q4, while y/y growth is expected at 2.9% vs. 4.2% in Q4. With the economy firm and inflation still high, the Bank of Korea will continue its tightening cycle. The swaps market sees 150 bp of tightening over the next 12 months followed by 25 bp in the subsequent 12 months that would see the policy rate peak near 3.25%. March IP will be reported Friday and is expected at 3.9% y/y vs. 6.5% in February. April trade data will be reported Sunday morning local time.

Caixin April China manufacturing and official PMI readings will be reported Saturday morning local time. Caixin is expected at 47.0 vs. 48.1 in March, while official manufacturing is expected at 48.0 vs. 49.5 in March. Official non-manufacturing PMI is expected at 46.2 vs. 48.4 in March, which should drag the official composite down by nearly two points from 48.8 in March. This should move it closer to the Caixin composite reading of 43.9 in March. Markets remain disappointed with the timid policy response so far to the intensifying slowdown that threatens the growth target this year of “around 5.5%.” Lockdowns remain in place and so data are likely to worsen in May as well.

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